Posted by: Josh Lehner | June 14, 2018

Data Visualization, A Few Notes

Periodically I get questions about data visualization and good sources to learn more or improve. There are myriad options out there including countless books and websites. However, in an effort to pare down any recommendations, I do have a few suggestions. Consider this a significantly incomplete reference, but also a good place to start. Specifically, there are 3 books on data visualization I cannot recommend enough, ordered in my particular preference among them even if you cannot go wrong with any.

  • “Storytelling with Data” by Cole Knaflic
  • “The Wall Street Journal Guide to Information Graphics” by Dona Wong
  • “Good Charts” by Scott Berinato

The key is taking the great advice given in the books and figuring out how to apply it using the specific software you use. Here there are a number of good sites that tailor their work to different software packages, with Excel being the most common. One of my favorites is Policy Viz which walks you through how to set up the spreadsheet and get Excel to do what it takes to create interesting visuals. Policy Viz also has lots of links and resources for analysis, visualizations and presentations. Another good source is the Storytelling with Data blog. Additionally there are also plenty of good YouTube channels like MrExcel and Excel Campus to name just two.

Now, for a few examples of things I’ve been playing around with. First up is the box-and-whisker-and-scatterplot chart I first saw on Twitter last month. Policy Viz has the details on how to create it. I recently used the horizontal version of this in the high-tech post comparing software jobs across large metro areas. Here is a look at state level prime-age EPOP. Just for fun. It’s detailed and complex but you get both the general and specific distribution of the data. I like it quite a bit, but probably not necessarily for a general audience.

One of the biggest challenges in data visualization overall is getting rid of pie charts. Especially those hideous 3D pie charts. I’m not here to run down all the reasons pie charts fail. I’ll send you to Ms Knaflic’s great “Death of Pie Charts” piece for starters there. But I am here to help tackle the big issue of visualizing budgets. When it comes to revenues and expenditures by type or category, we have a really hard time getting away from pie charts. So today I’ll present 2 possibilities for those interested: stacked column charts and treemaps.

For starters I’m going to use the 2017-19 Legislatively Adopted Budget as an example. This is by no means meant to pick on our friends in LFO or in BAM. Our office has plenty of our own data visualizations that need help. The key is to try and improve the form and function of your visualizations so they get better over time. And please, whatever you do, don’t look at the first chapter of the most recent Governor’s Recommended Budget because it’s full of terrible charts from our office, and I do mean terrible.

One of the main issues with pie charts is that having too many slices makes it hard to read — usually more than 5 slices. The spacing gets off and readers are unable to properly compare the size of the slices. This matters because pie charts are for showing hierarchical data, meaning which things are bigger or smaller than the others. And please note if you plan to stick with pie charts, do order the data and shade the colors correctly. That alone is a huge step up from the default chart settings. 

That said, one possibility for replacing those budget pie charts could be a stacked column graph. Here I’ve hidden the actual x and y axis to allow for better labeling (I think). The labeling is still scrunched for the expenditures. I tried adding leader lines for the labels but it looked too cluttered. But overall you can see where this is going.

Another possibility that works well with hierarchical data is a treemap. In the newest version of Excel they include this as an option. In older versions you have to make it yourself by adjusting the size of rows/columns and then shading them in appropriately like I have done below — this is all done by hand. An issue here is it can also be difficult to properly distinguish which segment is larger than the other.

Personally, I am rarely every satisfied with a chart. I am always looking for ways to improve them. The biggest item is to continue to play around with your data and try out different visualizations. You can make many different charts from the same data. Each may highlight a particular aspect of the data. It is important to know all of these aspects to understand the story the data is telling. However it is also up to you, the researcher, to choose the one chart that tells the audience your main point, or maybe the most interesting finding you have. And at the same time it is your job to choose the chart that properly conveys the message.

Posted by: Josh Lehner | June 7, 2018

Oregon High-Tech Outlook

This post circles back on the recent Headwinds and Tailwinds presentation I gave at the Northwest Economic Research Center’s forecast breakfast last month. It also ties directly into the previous post on Oregon’s industrial structure overall.

The biggest high-tech takeaway from an industrial structure point of view is that Oregon’s historical strengths are not expected to lead growth moving forward. Oregon’s high-tech legacy and our regional economy’s comparative advantage lies in hardware manufacturing, with semiconductors being the most prominent. This portion of the high-tech industry will continue to generate considerable economic output, both directly and indirectly given large-scale operations with supply chains, and the clustering of a skilled workforce. However, job gains over the next decade are unlikely to follow suit due to ongoing productivity increases. To the extent that a few of these firms do add jobs, there are others scaling back. As such, Oregon’s high-tech growth will be driven by the software side of the industry.

Over the past decade or so, employment at software firms has increased considerably. We’re talking 4.5-5.0% annualized job growth over the past 10 to 15 years. This is by far the fastest growing industry in the state during this time. The second fastest growing industry is health care at just under 3% annual growth. That said, employment at software companies remains a relatively small slice of the economy. It has gone from around 1% of all statewide jobs and 17,000 workers back in 2006 to nearly 1.5% of all statewide jobs and over 27,000 workers in 2017.

However, as our office previously discussed this software growth is a bit different than on the hardware side. First, software has not been Oregon’s comparative advantage like hardware over the decades. Just look at location quotients for semiconductors (6.3) and software (0.9). That means Oregon’s concentration in semiconductors is 6 times as large as the U.S. average, while our concentration in software is actually 10 percent smaller than the U.S. average.

Second, we’re seeing a number of outposts or satellite offices rather than headquarter operations and research hubs. Today this is not a problem. In fact the growth in these new, high-wage software jobs is all good news. In particular they are diversifying our economy and adding a component that hasn’t really existed like this previously. However, one concern may be that these outposts are more vulnerable during the next cycle when the spokes are cut and operations are consolidated at the hub. This may not happen, but it has certainly been the case in hardware in recent decades. Oregon, being the main research hub, has benefited tremendously as a result.

All of that said, at times we can lose the forest for the trees. The above looks at employment through an industry lens, or based on what the company actual does or produces. One thing our advisors have been, umm, advising us to do in recent meetings is to dig not just into tech industries but tech occupations. This is something we previously did a few years back and I have updated that work using ACS data instead of OES.

There is at least one key reason why tech-related occupations are preferable to industries and that is the fact that tech-related jobs are everywhere, and in nearly every firm. It may just be one network administrator or it may be a whole team of engineers, but tech-related occupations are spread across the entire economy today. So measuring just tech jobs at software companies misses the broader impact. And it also gives short shrift to one of Oregon’s key comparative advantages: the ability to attract and retain talent. Oregon’s high quality of life and strong regional economy helps local employers recruit top talent. This goes specifically for high-tech companies but also for hospitals, apparel and design firms, heavy manufacturers, the public sector and so on down the list.

In looking at tech-related occupations, Oregon and the Portland region do tend measure higher than examining industry-only figures. Specifically, the Portland metro area ranks 11th highest among the 50 largest nationwide in 2016. Now, while Portland ranks just ahead of Atlanta, Columbus, and Dallas, it does rank a bit lower than many of the nation’s leading tech hubs. Also note that while these tech-related jobs are growing as a share of all jobs over the past decade, Portland’s relative ranking has remained essentially the same. Software jobs are increasing everywhere, not just along the West Coast or in tech hubs. And while Oregon and the Portland area are seeing strong gains, they’re not significantly stronger than the growth seen nationwide or in other large metro areas.

In digging into these jobs a bit further, here are a few worker characteristics that stood out to me. These tech-related occupations in the Portland region are 74% male, 26% female, compared with all other occupations being 52% male, and 48% female. Tech employment is 77% non-Hispanic white, matching the other occupations (76%). Tech’s educational attainment is nearly double that for other occupations. The share of tech workers with at least a bachelor’s degree is 69% compared to 38% for all other occupations.

Bottom Line: High-tech jobs in Oregon are expected to increase, even as the sector transforms. Hardware remains a key economic strength, although employment is not increasing on net. The software growth diversifies our regional economy. However the impact of tech-related occupations is broader than software firms alone. Given the prevalence of outposts, some of this software growth is an economic tailwind with risk. The key to the long-term outlook is for Oregon to develop a critical mass of software and tech-related workers, so that the talent remains to rebuild the sector following the next downturn of tech cycle. To this point, every single one of our advisors believes we have reached critical mass. Our office largely agrees and the numbers support it. However, given the relative newness to the software industry in Oregon, we would also like to see how these trends behave over an entire business cycle to know for sure. But we do know that Oregon’s ability to attract and retain skilled workers is a comparative advantage moving forward.

Posted by: Josh Lehner | May 31, 2018

Oregon’s Industrial Structure and Outlook

This post circles back on the recent Headwinds and Tailwinds presentation I gave at the Northwest Economic Research Center’s forecast breakfast a couple weeks ago. It also provides an update on previous work along these lines, and this topic is always included in the Extended Outlook portion of our forecast document.

Oregon’s industrial structure is very similar to the U.S. overall, even moreso than nearly all other states. That said, Oregon’s manufacturing industry is larger and weighted toward semiconductors and wood products, relative to the nation which is much more concentrated in transportation equipment (autos and aerospace). However, these industries which have been Oregon’s strength in both the recent past and historically, are now expected to grow the slowest moving forward. Productivity and output from the state’s technology producers is expected to continue growing quickly, however employment is not likely to follow suit. Similarly, the timber industry remains under pressure from both market-based conditions and federal regulations. Barring major changes to either, the slow growth to downward trajectory of the industry in Oregon is likely to continue.

Note: This chart compares expected job growth among Oregon’s traded sector industries based on their relative concentration in Oregon, or location quotient. The larger the location quotient the larger the industry concentration in Oregon compared to the U.S. overall. For example, industries in the top quintile (the red bar) are at least 2.7 times larger in Oregon than in the average state. Conversely, industries in the bottom quintile are at least 25% smaller in Oregon than in the average state. Also note that this chart focuses just on the traded sector whereas the chart from the presentation (link above) included all sectors. However, the overall story remains the same.

With that being said, certainly not all hope is lost. Those top industries in Oregon comprise approximately 25 percent of the state’s traded sector employment, and 7 percent of all statewide employment. Many industries in which Oregon has a larger concentration then the typical state are expected to perform quite well over the coming decade. These industries include management of companies, food and beverage manufacturing, published software along with some health care related subsectors.

The state’s real challenges and opportunities will come in industries in which Oregon does not have a relatively large concentration. These industries, like consulting, computer system design, financial investment, and scientific R&D, are expected to grow quickly in the decade ahead. To the extent that Oregon is behind the curve, then the state may not fully realize these gains if they rely more on clusters and concentrations of similar firms that may already exist elsewhere in the country.

All told, it is somewhat of a mixed bag in terms of Oregon’s industrial structure and expected growth. Many industries in which Oregon has a relatively smaller concentration, will grow quickly in the future. Some of Oregon’s largest industries will grow less quickly. With that being said, there is lots of good news for the state’s economy, and the good news outweighs near-term concerns. However, keeping these facts and trends in mind is important when thinking about the outlook and how it differs, or remains the same, from our history.

I will pull out at least a couple more of the Headwinds and Tailwinds slides in the coming weeks.

Posted by: Josh Lehner | May 25, 2018

Kickers in Comparison (Not So Fun Friday)

In our office’s latest economic and revenue forecast, we now project that revenues this biennium will come in above the 2% kicker threshold for both personal and corporate taxes. This outcome is still far from a done deal as we have more than a year to go in the two year budget cycle, and more importantly we still have a whole tax filing season to come. The jury remains out.

That said, I thought it may be helpful to put the projected kicker in perspective. A common question we have been asked, both last biennium and again this week, is something like “That’s a really big number. Has Oregon ever paid out a kicker of that size?” The short answer is yes, we have. The long answer is yes, we have and given the economy is much bigger today than in decades past, the recent kickers are actually quite small. It really comes down to knowing both the levels (absolute $s) and rates (forecast error, or % of tax liability).

During the forecast presentation Mark made a comment along these lines in the context surrounding the fact that Oregon is losing Representative Barnhart to retirement this year. Rep. Barnhart has chaired the House Committee on Revenue since 2007, and we are thankful for his service. He is also the last man standing on the revenue committees who can tell people that a $500 million kicker really isn’t that big. The largest personal kicker paid out was just over $1 billion a decade ago. And yes, the kickers in recent biennia and the current projected kicker are larger in absolute terms than those paid out in the 1980s and 1990s, but Oregon is a much bigger economy today than back then.

This second chart tries to show this point. Instead of looking at the kicker size in dollar amounts, it looks at their size in comparison to tax liability. If the current forecast holds, it would be the 8th largest kicker in our office’s history, out of 12 total. The kickers generated during the 2013-15 and 2015-17 biennia rank as the 10th and 11th largest kickers.

Another question we get is if the forecast is off by 2 or 3 percent, why is the kicker credit closer to 6 percent? The reason is the forecast error is over 2 years and includes all General Fund revenues excluding corporate, but then paid out on just one year’s worth of personal income tax liability.

So what does this mean for you, as a taxpayer? It’s still a bit fuzzy at this point given the projected kicker, should it come to pass, will be a credit on your 2019 taxes filed in early 2020 based on your tax liability from 2018 (this year). As such, any calculation is based on multiple forecasts. That said, roughly speaking we’re looking at the kicker credit being about 6%, which translates into the average kicker being around $270, with the median about $125. We will have a better handle of these estimates and at various points in the distribution as we move forward and as our forecasts evolve with economic performance, actual tax collections, and future expectations.

Posted by: Josh Lehner | May 23, 2018

Oregon Economic and Revenue Forecast, June 2018

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

The U.S. economy continues to perform well. Economic growth remains above potential and job gains are strong enough to pull down the unemployment rate even as more individuals are looking for a job. The business cycle is not yet waning and the near-term prospects for economic growth are good. The consensus of forecasters peg the probability of recession over the next year at just 15 percent. However, longer-run forecasts remain relatively muted, in part due to the impact of an aging population and the temporary provisions in the federal fiscal stimulus. From today’s relatively strong cyclical vantage point, three real downside risks stand out. First is the Federal Reserve’s ability to engineer a soft landing. Second is the potential for deteriorating international relations and trade. Third is the recent run-up in energy prices which crimp household budgets in the near-term. To date, actual constraints on growth appear to be minimal, but bear watching in a mature expansion.

In Oregon, the outlook remains bright as the economy continues to hit the sweet spot. Wages are rising faster than in the typical state, as are household incomes. That said, growth is slower today than a few years ago as the regional economy transitions down to more sustainable rates. While housing affordability is set to improve due to rising income and more new construction, the impact on household budgets and migration flows makes it a risk. All told, the forecast calls for ongoing growth and there are no real concerns seen in the Oregon data.

Oregon’s General Fund revenues are heavily dependent upon personal income tax collections.  As such, the April peak tax filing season often makes or breaks the state budget. This year’s tax collections came in at a healthy rate, somewhat faster than what was assumed in the March 2018 forecast. If not for the payment of kicker credits from the 2015-17 biennium, Oregon’s growth would have ranked among the top handful of states.

Typically, year-end payments and refunds are the most difficult tax components to forecast. This season refunds will likely end around $150 million short of expectations, while payments closely matched the outlook. However, the biggest surprises came from usually stable sources — quarterly estimated payments and withholdings.

2017 fourth-quarter estimated payments of personal income taxes were up nearly 50% relative to last year, and continued to post strong gains in early 2018. Advanced corporate tax payments have been up sharply in recent months as well, with the first quarter of 2018 coming in 79% larger than last year.  Furthermore, large year-end bonuses are driving withholdings significantly above what recent wage growth alone could explain.

This strong growth across payment types was not unique to Oregon, with many other states reporting even stronger gains. That sort of uniformity is rare, and suggests that tax planning around the federal Tax Cuts and Jobs Act is already affecting the timing of tax collections. Taxpayers rushed to take advantage of expiring breaks, including an uncapped deduction for state and local taxes paid, even as Oregon does not allow the prepayment of state taxes. Some of the recently strong revenue growth will no doubt evaporate going forward.

While changes in the timing of tax payments are already evident, it will take some time before it becomes clear how many taxpayers will change their filing status in light of TCJA provisions.  Some workers could choose to file as businesses.  Some businesses could change from pass-through entities into C-Corporations, or the other way around. While the exact magnitude of the tax law changes is uncertain, it is sure to be large.  These changes are expected to directly add hundreds of millions of revenue dollars over the next few budget cycles.

Together with healthy economic growth and strong tax collections, law changes have helped push both personal income taxes and corporate income taxes over their kicker thresholds. If this outlook holds true, $555 million in personal income tax kicker credits will be paid out two years from now, and an additional $197 million will be dedicated to spending on K-12 education next biennium.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | May 18, 2018

Fun Friday: Do People Really Downsize?

The question, or the assumption that older households downsize as they age is one that I’ve really struggled with trying to answer. Obviously it makes theoretical sense. As one’s children grow up, you no longer need as much space, and the love/hate relationship with the yard may become more physically taxing. I hear comments along these lines quite frequently. And many urbanists rightfully point out that one of the benefits of the missing middle housing — duplexes, quads, townhomes, etc — is it better allows aging in place. That is it would provide additional housing options within existing neighborhoods so if a household does sell/downsize, they do not have to leave their longtime friends and social networks. They can remain in the same area. An added benefit in this scenario would then be a larger, single family home coming back onto the market for another family to move into. We could adjust, or tailor our housing situation with our actual housing needs. Again, all of that makes sense. But do we actually see households downsize overall, let alone stay in the neighborhood? Turning to the data shows that it it kinda, sorta does happen on a small scale. However the silver tsunami of aging Baby Boomer households means we should see an increase in the absolute number of downsizing households in the coming years, even if they do not represent a large share of the housing market overall.

First, let’s set the stage with the fact that older households are increasingly living in single family homes later in life in recent decades. The chart below comes from some interesting work from Jordan Rappaport, an economist with the Kansas City Fed. As Jordan notes, there are real, positive social and medical reasons for these trends over the years. And while the delay is occurring, many older Americans do move to an apartment (or to a nursing facility) as they enter into their more advanced years.

The question our office keeps coming back to is whether this represents true downsizing, or is it more about physical/medical needs and even end-of-life care? In digging into the data it looks to be mostly the latter and less of the former for most households. In fact, moving rates (either across state lines, or within the state, or within a county) are the lowest for those in their late 50s through their early 70s. There is no real retirement-age bump in migration or moving rates. Those only start to pick up as individuals and households age into their 80s, as seen in the Rappaport work above and in the Oregon work below.

Now, even as moving rates and downsizing are pretty infrequent when measured across the entire population, we do know that it does occur. I call these the Most Interesting Households in the World. They don’t always move, but when they do, they downsize. As seen in the second chart below, the households that move in their 60s, 70s, and 80s are moving into smaller housing units overall. They’re dropping around 2 rooms, which is quite a bit. Now, these are not 2 bedrooms necessarily, but two non-bathroom rooms. Think about how many rooms are in your apartment or house. For the vast majority of us, taking away 2 rooms would represent real downsizing.

The work above focuses on people living on their own (or with family or roommates) and excludes those living in a retirement/nursing home. Census classifies those as group quarters. We typically ignore group quarters (dorms, prisons, hospitals, nursing homes, etc) when talking about household trends and it works most of the time. However nursing homes play an important societal role as we age. Now, even as this complicates the numbers above which ignore moves into group quarters, it is unlikely to represent a major shift in the patterns given that the nursing facilities population is, at most, ~10% of the population.

Finally, it is important to note the distinction between levels and rates. All of the above focuses on migration or moving rates, and shows that not many households actually move, or downsize overall. However, given the large Baby Boomer cohort is essentially in their mid-50s to their mid-70s, there are and will continue to be many more older households across the country and here in Oregon. Even with low moving rates, the fact that there will be considerably more households in their 60s, 70s, and 80s in the coming years means that the overall number of households moving, and downsizing, will increase. In the convoluted chart below I tried to show this for the Salem MSA, based on work I did for local realtors a few months ago.

The light blue bars show the expected change in the number of households in the area over the next 8 years. The largest increases are seen among the 65-74, and 75+ year old households. The vast majority of these households are not new Salem area residents. Rather they are households that already live here, and are simply aging into these age groups. Conversely, many of the 25-44 year old households would be new residents moving into the region, even as local demographics are great.

The dark blue bars take moving rates by age group and looks at how many households are expected to move each year. Given moving rates are highest for young households, we see higher volumes there. However, even with low moving rates, the absolute number of older households who are expected to move is larger today than in the past given the increasing number of older households in general. We should see more downsizing overall due to the aging population, even if the share is not rising over time.

UPDATE: This chart may better show the trend and growth expectations of older households moving. Clearly, such households move at a lower rate than younger households, but given the population forecast, older moves are expected to increase in the coming years.

Bottom Line: Moving rates and downsizing among households in their early retirement years is not very common. In fact it is less common today than in decades past. However, among those that do move in their 60s and 70s, they downsize. Given the large Baby Boomer generation continues to age into their retirement years, the absolute number of such moves is expected to rise, even if it remains a relatively small share of the housing market overall.

Posted by: Josh Lehner | May 17, 2018

Oregon Beer Production, 2018 (Graph of the Week)

It turns out that not every week is craft beer week. Who knew? But this week, it actually is. So in honor of our value-added manufacturing, declining start-up trend bucking, homegrown Oregon breweries out there, I thought I should update our numbers of Oregon beer production. These figures come from the OLCC beer reports which only cover beer made in Oregon and sold in Oregon. So beer imported into the state from other breweries, and beer made here but exported to other states or countries are not included in these numbers. It also includes all Oregon breweries, regardless of ownership or brewing techniques. The goal here is not to get bogged down into defining what craft beer is. Rather it’s to look at Oregon beer production.

At the last check-in on these numbers we knew that over the past decade or so the number of Oregon breweries had tripled and beer production had doubled. So, for me, the biggest takeaway from this updated look is that start-up breweries, defined here as those that didn’t exist before 2005, now produce more beer made in Oregon and sold in Oregon than the older breweries combined. At this point it is well known that the larger, regional breweries have seen flat to down trends in recent years. You can see that in the national figures and the local numbers as well. However, production trends vary by brewery. Some have experienced massive declines, but most of the declines to date are relatively modest, or in a few cases nonexistent. At least in terms of their Oregon numbers. Right now it’s pretty easy to paint a dark picture for the larger breweries given the overall slowing market, some consolidation among distributors and retail outlets, and a small uptick in failures. Those are real issues. However, overall beer production in Oregon continues to increase, primarily due to the ongoing growth among start-ups, and expansions from a few of the older breweries as well. 

Now, we also know that like a lot of markets, a handful of firms dominate overall sales. The 5 largest breweries in Oregon made 40% of the beer last year. The 20 largest made 75% of the beer. Given the typical brewery in Oregon produced just under 500 barrels of beer, this is not surprising. As such, we know that even a large portion of the start-up growth is due to a few breweries. One-third of the start-up production last year can be tied directly to 10 Barrel, Hop Valley, and Ninkasi. That said, if you take those three breweries out of the start-up numbers, the remaining start-up breweries in Oregon would still produce as much as the state’s legacy breweries.

Finally, it must be noted that we should take these figures will a grain of salt. In recent years a handful of breweries seem to have gone missing from the data. Most are relatively small and will not have much of an impact at these topline numbers. However, Craft Brewers Alliance (aka the makers of Widmer, Redhook, Kona and others) does move the needle since they were, and probably still are the largest brewery in the state. To arrive at these estimates I am pegging CBA’s Oregon beer numbers based on the CBA’s reported growth rates. To the extent that Oregon trends differ from the company’s national trends, then the estimates will over- or underestimate the legacy brewery trends over the last couple of years.

Posted by: Josh Lehner | May 15, 2018

Economic Headwinds and Tailwinds

This morning I have the privilege of being a part of Portland State’s Northwest Economic Research Center‘s forecast breakfast. NERC, of course, is headed by Tom Potiowsky who used to oversee our office as the state economist for much of the 2000s. In recent years, Tom and his team have created regional economic forecasts in addition to other research and consulting work.

My part of the forecast event is a presentation that focuses on some of the bigger picture issues and risks, or headwinds and tailwinds in the economy. I tried to stay away from some of the short-term supply side constraints we’ve talked about quite a bit in the past year. Instead, I focus on larger, structural issues in the economy that we don’t always get the time to highlight and discuss. Some of these issues are Oregon-specific, even regional-specific, while others are national in scope.  After pulling together the presentation, I did realize that much of this is tucked away or buried deep in our official forecast document. That’s both good news (yay, we included these topics) and bad news (boo, we kind of give them short shrift). So, in the coming weeks I’m going to unpack a few of these topics a bit more.

While we may not cover most of these issues on a regular basis, we have touched on all of them at least once before. For those interested in more, see these links.

Stay tuned for the updates, although most will be after our upcoming economic and revenue forecast release which is next Wednesday, May 23rd.

Posted by: Josh Lehner | May 9, 2018

Lower-Income Households Not Yet Fleeing Portland Region

Over the past decade the number of lower-income households in the Portland region has fallen by nearly 60,000, or by 15%. Here, we’re defining lower-income to not just be those in poverty, but generally speaking in the bottom 40% or so of the distribution. Conversely, the vast majority of household growth this cycle is among those making $100,000 or more. To the extent that these changes reflect a stronger economy in which household incomes are rising, then this is great news. However, we also know that lower-income households and those on fixed income bear the brunt of the housing affordability crunch. The concern for current residents and for future growth is that some of this drop in lower-income households may be due to folks packing up and leaving the region entirely.

As our office regularly discusses, the concern is that affordability may eventually slow or even choke off migration entirely. That outcome would be terrible for local residents as housing costs rise, it would lead to greater displacement as only higher-income households could afford to move here, and it would potentially lower medium and longer-run economic growth*. These concerns are not just theoretical. We know that lower-income households are moving out of California in greater numbers, and work from BuildZoom’s Issi Romem shows that nationally we are experiencing a sorting across metro areas based on income, educational attainment, and the like.

So what about the Portland region? Here, thankfully, we are not seeing net out-migration among lower-income households. In every year in the past decade more lower-income households have moved into the Portland region than have moved out of the Portland region. Additionally, the gross flows do not seem to be slowing much either. That is the affordability issues do not seem to be deterring folks from moving here in the first place.

Furthermore, when we look around at the reasons why people move away, there doesn’t appear to be much of an increase in those citing housing as the reason. We have to switch to state level data due to availability and sample size issues. However, even as there was an uptick in housing-related moves a few years ago, those have slowed lately and always remained a minority of the reasons people left Oregon overall.

Combined, at least in the data we have available to work with, it does not appear that housing and housing affordability in particular are driving households away from the Portland region, or Oregon more broadly. Overall that is very good news from a societal and an economic (labor force) standpoint. Now, that is not the same thing as saying there is no impact. We know that there is. Displacement is certainly occurring within the Portland region. Lower-income households have been and continue to be pushed toward the edges of the metro region, into east Multnomah County in particular. This is part of the increasing geographic disparities seen across the state. While the added housing supply in the urban core is now holding down rents and raising vacancy rates, this is not yet the case in East Portland, or in Troutdale/Fairview/Wood Village/Gresham based on the latest Multifamily NW apartment report. While these areas have some of the lowest rents in the region, they also have the lowest vacancy rates today.

OK, so if out-migration does not explain the declines seen among lower-income households, what does? I originally had a much larger research project focused just on this question but have shelved that. The end results, via a process of elimination shows that the decline is due to higher household incomes, likely the result of a stronger economy. That may seem a bit tautological, and to certain degree it is.

There are lots of puts and takes when it comes to households, household incomes, household formation and the like. However, in controlling for a lot of these known factors — migration trends, inflation, demographics, headship rates — I found that they largely offset overall. For example, we know headship rates are falling so that would indicate we should have relatively fewer households. However we have more 20- and 30-somethings today meaning we should have relatively more lower-income households as young professionals typically earn less money than more experienced workers. But these two factors are of approximately the same magnitude, but in different directions, thus offsetting each other. Furthermore young adults doubling and tripling up in apartments as opposed to living on their own is not a large enough factor here to explain these differences either. So the end result I am left with is that household incomes are rising as more people have a job and wages increase as well. We obviously know this is happening, but it is also useful to know that these other influences on households are not a significant driver of the overall trends in recent years.

Bottom Line: The housing affordability crunch has caused issues within the Portland region, and across Oregon. Lower-income households are less able to afford the higher rents today. And even as affordability is set to improve in the coming years as incomes rise and rents slow, housing costs are a significantly higher share of household budgets than 5, 10, or 20 years ago. The one silver lining here, from a regional economic perspective, is that households are not packing up and leaving the region entirely. That said, being pushed to the edges of the metro area causes other problems in terms of commutes, transit access and the like.

* Would worsening affordability actually lead to lower growth in the future? This was the topic of conversation among our advisors recently and it’s hard to tell. Theoretically it makes sense. However if you look at California, and the Bay Area, it is difficult to say their growth is suffering. Job growth in California has matched Oregon’s, as has San Francisco’s matched Portland’s. Now, the counterfactual is very likely that California and the Bay Area would be growing faster than they are if not for the affordability problems and lack of supply. This means an alternative to slower growth, would be increased displacement. This has occurred in the Bay Area, where lower- and moderate-income households are pushed out and experience longer commutes and the like. As such it is reasonable to think that could occur in the Portland region as well. Overall economic growth may not be that much slower due to a worsening affordability and supply problem, but distribution of that growth and consequences for lower- and moderate-income households certainly would be worse.

Posted by: Josh Lehner | May 3, 2018

Rising Home Equity in Perspective

We all know that the combination of growing demand in the face of limited supply has pushed housing costs higher. One side of this coin means eroding affordability for renters, and for those looking to buy. Clearly this has happened and is a big problem, even as affordability is set to improve some in the coming years. The other side of the coin, however, means rising wealth for current homeowners. Home equity is by far the biggest, and at times the only source of wealth for households outside of the top of the income distribution. As such, rising home equity isn’t entirely a bad thing. It’s a problem when appreciation and home equity gains outstrip income growth, leading to greater inequality and the like. In recent months I have seen a handful of reports scroll across Twitter showing home value gains in different metros around the country. It made me wonder just how much housing wealth has been created due to the lack of supply and affordability crunch in recent years.

Unfortunately, while data on home values is plentiful, data on home equity is not. So I have stitched together data from the American Community Survey that shows home values, and the number of homeowners with a mortgage and those without a mortgage, data from the Philly Fed’s consumer panel that shows debt loads for mortgages and home equity lines of credit, and data from the American Housing Survey that shows home values and mortgage situation for households based on how long they have lived in their current residence. The only Oregon geography for which all of these pieces are available is the Portland MSA, and we need all of these pieces to pull together an estimate of home equity.

The big takeaway of course is that we have seen a big rise in home equity in the Portland region in recent years. These gains are significantly larger than any measure of economic growth during this period. This first chart below shows the annual increases in dollar amounts for total home equity, total personal income, and for the region’s GDP. In the past few years, home equity increases have been twice as large as underlying economic growth. In terms of the outlook, the baseline forecast expects home equity gains to slow due to prices rising at a slower pace, and with new homeowners having larger debt loads, thus shifting the composition a little bit. That said, home equity gains have been quite large in recent years and are still expected to match economic growth moving forward.
The housing wealth created this cycle is larger than the gains created during the housing bubble. Some of that is due to inflation (higher prices), some due to relatively lower debt levels (larger down payments, fewer second mortgages and HELOCs), and some due to having a larger population today. However, even when measured as a share of the economy, home equity has now surpassed its previous peak. Keep in mind that land values or home values are significantly higher than this which just measures net wealth (values minus debts).

Now, tying these new estimates back to the aforementioned reports from around the country shows that the typical homeowner in Portland has seen a significant increase in wealth. Over the past 5 years, the median homeowner equity has increased by about $121,000. While these increases may be smaller than those seen in the Bay Area or up in Seattle, these are still quite large. To help put it in perspective somewhat, the next chart shows the annual gain in home equity in the blue bar, and the percentage of households in the region that earned less money than that during the year. Lets take 2016 as an example, albeit an extreme one. In 2016, the typical homeowner saw their home equity rise by $39,000. During the same year, 28% of all Portland area households had incomes of $39,000 or less. The goal here is not to fan the flames of some sort of class warfare. Rather it is to help frame and quantify the discussion surrounding the current housing market. The wealth gains in recent years due to the unbalanced market are big. UPDATE: Equity and wealth are not the same as income. While a homeowner can tap their wealth via a home equity line of credit, it is still not the same as cash flow. To fully realize these gains, an owner has to sell the property.

Another way to show the same sort of thing would be to convert the home equity gains into their hourly wage equivalent (based on an FTE of 2,080 hours). Essentially the housing wealth created this cycle is the equivalent of adding a low-wage job to one’s household income, or in this case wealth. Of course the big difference is, you know, that current homeowners reaped the benefits of the rising market without having to perform any actual work.

Finally, it should be pointed out that the housing wealth created this cycle has been on a narrower base. First, homeownership is lower today, meaning fewer households as a share of all households, have seen these increases. The flip side is that landlords and other property owners have seen a larger share of the gains this cycle.

Second, we know wealth is even more concentrated than income. This goes for the overall distribution, where asset price increases accrue to the top of the distribution, but it also goes for differences seen across various racial and ethnic groups. While the racial wealth gap nationwide is large, and the gap is more complicated than homeownership alone, we know that housing and home equity makes up a large portion of most household’s wealth. Locally we can see that concentration by race and ethnicity as well. 

Bottom Line: The current housing market has created clear winners and losers. As our office tries to highlight as much as possible, one of the biggest risks to the regional outlook is our ability to ensure an adequate housing supply. There are two big reasons why. First, an adequate supply means better affordability, benefiting local residents and their household finances. Second, not enough units will slow migration, increase displacement, and the like. The end result would be to lower our longer-run economic growth prospects if the inflows of young, skilled households dries up.

I’ll have more on migration and housing-related moves next week.

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